Obama Wins! - So What's Next?

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Martaug - I completely agree. The Stimulus Bill is not perfect in that regard. I would have liked to have seen more spent on roads, bridges, on schools, construction, etc. And I agree that there is some pork in it that we can live without. But on balance, there are some good things in it as well.

I agree, they grow them pretty strange there. Obama is fine, IMO. But I think the mayor must be in a "ballsey" match with Senator Burris. After appearing to be the next biggest liar of the new year, next to Rod Blag himself, he actually said that he sees nothing wrong with trying to raise money for the poster boy for American political corruption:

Now THAT takes some big ones.

http://firstread.msnbc.msn.com/archive/2009/02/17/1799108.aspx

 

Chandos, historically speaking, dropping taxes on businesses and the rich actually increases tax income (think a !SALE! effect). None of the 'stimulus packages' have worked so far, and I don't think this one will either. I also heard this has a stipulation on the money to colleges and universities that they don't get money if any religiously-based groups use their facilities for anything. Is this true? Was it cut? Is it in?

 

I think that was just reading too much into what vague wording there is in the bill about that.

 

No, actually sometimes they don't. It was one of the first things Hoover tried in the early part of the Depression and it made that situation worse. After a few years he raised them again, but it was already too late. But really, it depends on the tax cut. Another example was the tax cut in 1993, which the Dems voted for but the Republicans voted against. That one did work well. The Tax Relief Act of 1997, which was a Repulican/Clinton tax cut did work well also. But those were targeted to the middle class.

What I think works best, as a former sales person, is a targeted tax rebate check, like Bush gave out last year. That did work, since I sold to many customers who were using their rebate checks to make purchases that they otherwise would not have. When I talked to other sales guys at different companies, they experienced pretty much the same thing.

 

To expand on what Chandos mentioned, this really isn't true. Cutting income taxes has never increased revenue, but lowering business taxes has worked in a few isolated instances by encouraging businesses to relocate their home offices or to cease exploiting tax loop-holes in order to qualify for other incentives. Cutting corporate taxes can sometimes work, but the idea that we can somehow increase revenue by lowering the income tax rates of the wealthy is little more than a pipe dream.

FactCheck.org wrote a very interesting on the subject about a year ago. It's still worth reading. A few excerpts:

 

Oh come on martaug - he hasn't even been in office a month yet, and most of his efforts up to this point have been on getting a stimulus package passed. I think we can all agree that the economy is rightfully Obama's top priority upon assuming office. If this was a second term and he STILL had not made good on campaign promises you might be onto something, but can we give the guy a little bit of time to do some of this? I think if he started working on these campaign promises and not the stimulus, people would be complaining about how he was kowtowing to "special interest groups" while the economy of the nation was crumbling.

I think that could work IF they would spend it. When President Bush gave out rebate checks last year, there was a small bounce in the economy. Not enough to pull us out of the recession, but a slight bounce. The reasons for this were varied, but it appears that a good number of people used their rebate checks to catch up on their mortgage, pay down debt, or saved them in case they lost their jobs (which, given the rate at which jobs are being lost, is not an entirely unreasonable position to take).

While it's nice to say we should let taxpayers spend their checks however they want (and I'm certainly not implying that the government should dictate how we spend our money), the fact remains that a good number of people socked the money away in a savings account, and a chunk of others spent them on things that do not help the economy. (Paying down credit card debt or catching up on your mortgage payment does not help the economy.)

Further, even if the entire package was tax rebates, I'm still not sure that it would work. Say, for sake of arguement that the entire $787B was given in rebate checks. Each taxpayer would get a check for about $4,000. As you are well aware, many Americans are easily behind by more than $4,000 when it comes to credit card and mortgage payments. I think that by using the money to create jobs you will allow a good number of people to earn a lot more than $4,000 each.

One final point: While $787B is a truck load of money, my principle concern with the stimulus is that it isn't big enough. Many top economists say that to truly fix the banking industry, the mortgage crisis and the economy, that the current stimulus is only going to scratch the surface. The total price tag looks to be something on the oder of $3 trillion - or about 4 times the amount contained in the stimulus package.

 

Yeah and if you really wish to cut income taxes in order to boost the economy the best way to go about is to make tax cuts to the poorest. Why? Because those tax cuts will almost certainly be reflected in spending while the richer classes tend to put their tax cuts in savings.

 

While I don't mind increasing taxes on the wealthy, increasing taxes on business is usually a poor method to stimulate growth. Taxes on business are simply passed on to the consumer which results in higher prices and fewer people making purchases. On the other hand, lowering the taxes on a product already on the market rarely results in lower cost to the consumer (the company just posts increased profits -- which helps stock prices and retirement accounts).

I personally did not believe a single promise of tax relief from the campaigns. Lowering taxes right now is fiscally irresponsible. If you still have a job, you can continue to pay taxes.

 

Exactly. The poor and the lower middle class, out of necessity, tend to spend all of their income each month. The upper middle class and the wealthy, on the other hand, can afford to save a substantial portion of their income.

I couldn't agree more. Increasing taxes on business may temporarily increase revenue, but it won't stimulate growth. As I see it, raising corporate taxes a little during an economic boom can be a good idea because too much growth, too fast can sometimes be a bad thing (I doubt I'm the only one here who remembers the tech bubble), and also because it is beneficial to be able to lower business taxes when the economy needs a boost. When the taxes are already at rock bottom, our social programs are already underfunded, and we're already running at a massive deficit, lowering taxes when we need to do so gets a little tough.

 

Maybe I'm missing something but if everyone got a little money -- say, $800 -- and some of them put it on their mortgage, how does that not, eventually, help the economy? I mean, short term, sure, it doesn't consume a new product, but those people are $800 closer to home ownership, which means that they are $800 further away from a foreclosure, and it is my understanding that foreclosures are Bad for the economy, yes?

In any event, it would relieve some stress in the lives of the populace, and that would mean something in the long run, too!

 

It doesn't help the economy because it does not fix the underlying problem. These people have bad mortgages and, in many cases, owe more on their homes than they are currently worth. It is extremely unlikely that $800 is going to make the difference of whether or not they are going to lose thier home. Sure, it might help them make next month's mortgage payment, but if it only delays foreclosure by a month, how does that help - either in the short or long term?

Plus, saying that they are $800 closer to home ownership is almost laughable (even if it is technically true). These people are in the first couple of years of a 30-year mortgage in most cases. (Unless you mean to imply that when you said "eventually" you meant it will help the ecomony sometime in the next couple of decades?) Some of these people cannot ever afford to pay the interest on their current loans. It's not like if they get help for one month that everything is going to be fine from here on in.

 

As Aldeth said (quite well, btw), the $800 boost (which was even less if you payed less in taxes) was about like taking one drop out of 5 million buckets and putting them all into one bathtub. The buckets barely notice, while the bathtub has now gone from full to overflowing.

The right way to do this would have been to spend that money on infrastructure improvements, with as much work being done by direct gov't employees (as opposed to contracted companies) as possible. This is what FDR did (among other things) in the Great Depression, and it helped a great deal. It creates jobs, mostly for the poor that need them most, improves the economy by buying materials, and provides a real and direct benefit (infrastructure improvements) to the country. These benefits are especially needed these days by the US, with aging bridges, roads, electric grids, underground pipes, sewers, etc.

 

I agree - the best thing about spending to improve the infrastructure is you actually get something useful out of your investment - a new bridge that won't collapse - higher levees that won't be breached by a storm surge - a wind farm providing renewable energy hooked up to the electrical grid.

I would gladly forgo the $800 I'm going to get in a rebate check in favor of more government spending programs.

 

Thanks for the heads up Aldeth. I wasn't really referring to the doofuses who got in over their heads. They are hardly the majority of the population. I was talking about the regular, run of the mill people who are slogging away at reasonable mortgages.

And even if the rich put the money away into savings, doesn't that increase the holdings that the bank has? And therefore the bank can now make more loans?

I guess my bottom line is that I love the infrastructure idea as much as the next guy, but I'd rather have money in my pocket to do with as I see fit than see it wasted by cronies and not get the infrastructure anyways.

 

True enough. Truth be told, the number of homes that have been foreclosed in the last year or are in danger of going into foreclosure represent 7% of all homes in the US. Or to put it into another perspective, 93% of Americans do NOT have mortgage troubles at the moment.

I can see your point in having more money in your pocket, I just think that putting people back to work will improve the economy, the stock market, and with it my 401k plan, which is worth a heck of a lot more than $800 to me.

 

This man speaks the truth.

 

If you ignore the fact that high foreclosure rates damage everyone's property values and freeze everyone's credit -- even if the people losing their properties to foreclosure are partially or wholly to blame for it -- this man speaks the truth. If you ignore the utter infeasibility and outright stupidity of using an internet poll of laymen who don't know the first thing about economics to dictate our policy going forward during our worst economic crisis since the Great Depression, this man speaks the truth. If, on the other hand, you recognize that financial instability in one sector of the market carries over to the rest of it, and that the people issuing sub-prime and no-doc loans to high risk borrowers and then bundling them for sale as "secure" investment vehicles share more than a little of the blame themselves, this man is a raving lunatic.

 

TGS - I watch CNBC everyday. I'm very familar with Rick and many of his compatriots on CNBC. They argue most of the day with him. Rick is an interesting fellow. He was on this morning with Morning Joe (Morning Jerk would be more accurate) and he was ranting the same free market rhetoric. You do understand that it was the "free market" that brought us this mess, not the politicians?

With that said, I feel pretty much how he does about having to pay for other people's homes. Nevertheless, we bailed out the big banks and Wall Street. We rewarded the bad behavior of the guys who brought us this mess. If you are willing to say that we should not have helped them, then you have a valid point. But if you are just for helping the fat cats and not the regular working person, then you should rethink your sense of fairness.

I hope we are at the bottom. If not then you can expect that this will be like the 1930s. Did you ever think that you would experience a Great Depression in your lifetime? If the bottom keeps falling you do realize that we are going to have a lot more to worry about than a few homeowners.

Here's the debate with Rick:

http://www.msnbc.msn.com/id/21134540/vp/29297987#29297987

 

I totally agree. I don't think it was the government's job to bail anyone out.

Nature abhors a vacuum. If one company goes under, another one takes its place. Imagine if the big three autodealers went out of business. Would a lot of people lose their jobs, yes they would. However, people still need cars, they would end up having to buy them from foreign car companies. However, many of the foreign car companies make their cars here in the states rather then sail them across the ocean. Wouldn't they have to hire people to make all the new cars? Wouldn't some enterprising people buy the assets of the big three for pennies on the dollar and figure out a way to compete? I'm guessing yes.

In regards to housing, what happens if someone loses their house? They have to move, they will probably have to move into an apartment. Is that so terrible? The people who are claiming that they were "victim" of predatory lenders, I have no sympathy for. They signed each and every page of their mortgage and therefore should have known what was going on. They are adults, it isn't like they were ten year olds.

Banks, if a bank goes under the people who get hurt are the people with over $100,000 in the bank and lose out on the FDIC insurance. I don't think we are going to be able to garner much support for people who had that much in the bank, when everyone knows that was the limit. If you have $150,000 don't be such a lazy ass, and open up accounts at two different banks. Personally, I think it would be a great thing if the huge banks went under. I like working with the local banks as they operate like a bank is supposed. They take deposits and then loan them out to others as mortgages. They don't sell them. Here in MA I deal with a couple of very solvent multi branch banks that do exactly that. They have signs everywhere saying they are solvent and plan on staying that way.

The only thing I don't completly agree with you on is if the free market is to blame for this mess. In my opinion, the free market is to blame only because the politicians allowed/encouraged it. A prudent bank would never make loans to someone who couldn't pay it. Since Fannie/Freddie gave the banks an outlet to make risky loans and then sell and get out of them this was bound to happen.


EDIT: I just watched the Today show clip and I agree with him even more.

 

What they encourged is the market to be "free," which is what the market has been asking for since the 1980s when RR came to office. This is Mr. Greenspan on the problem (who was first appointed by RR):

In Mr Greenspan's defense he claims that he lowered interest rates to the historic lows after the attacks on 9/11 because he feared that the shock to the economy would be too great for the markets. I think that is a reasonable move after the attacks, because I still remember how the market had panicked upon opening after the attacks.

Also, Rick spoke in the clip about how these derivatives were leveraged, and Rick agrees that has caused the problems in the market . But Greenspan opposed those regulations:

http://www.nytimes.com/2008/10/24/business/economy/24panel.html


Derivatives, such as CDOs, were at the root of the problem:

http://en.wikipedia.org/wiki/Collateralized_debt_obligation